the commercial litigation journal · 2 the commercial litigation journal november/december 2019...

The commercial liTigaTion journal

www.lawjournals.co.uk November/December 2019 • Number 88

Nice tryArguing that privilege ends after a company’s dissolution

Take it outsideService out of the jurisdiction

Speaking terms?A conversation that was not a binding contract

Making amendsCompensation for an inventor

Wild goose chaseA failed injunction against persons unknown

See you laterAgreeing an extension of time

Critical conditionWhy the classification of a contractual term is crucial

Loyal companionDoes a relational contract imply a duty of good faith?

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Contents The Commercial Litigation Journal

Insights by Penningtons Manches Cooper: survival of the fittest Page 2Clare Arthurs and Nicole Finlayson stand on the touchline to witness privilege bouncing back

Service: glosses, explications and reformulations Page 6Alexander Halban reports on clarification by the Court of Appeal of the test for service out of the jurisdiction

Contract: oral agreements – a formula for uncertainty Page 9Tamsin Baird analyses a judgment illustrating the dangers of oral agreements

Intellectual property: sweet success Page 12Ilya Kazi and Alex Robinson look at a recent Supreme Court decision with potential impact for business

Injunctive relief: on a wing and a prayer Page 14Alison Oldfield considers the lessons to be learned from the Canada Goose decision

Practice: time travel Page 17Simon Heatley and Georgia Fullarton measure the extension of time by the judiciary

Key terms: square pegs and round holes Page 20Gwendoline Davies explains the importance of categorising contractual terms

Drafting: choosing your friends, and relations Page 22John Flint places a recent decision on relational contracts in context

2 The Commercial Litigation Journal November/December 2019

Survival of the fittest

Clare Arthurs (pictured top) is an associate director and Nicole Finlayson a knowledge lawyer with Penningtons Manches Cooper LLP

A s rugby fever swept the nation, legal advice privilege once again found itself front and

centre on the judicial pitch. In Addlesee v Dentons Europe LLP [2019], a strong bench in the Court of Appeal held that legal advice privilege survived the dissolution of the client company, and disclaimer by the Crown.

BackgroundA large group of investors invested in a scheme marketed by Anabus Holdings Ltd, a Cypriot company (Anabus). Salans LLP (later renamed Dentons Europe LLP (Dentons)) acted for Anabus at the relevant time. Anabus was dissolved in Cyprus in January 2016. In May 2016, the investors cried foul, issuing proceedings against Dentons claiming damages for deceit or negligence. They sought disclosure of documents passing between Salans and Anabus which were now in Dentons’ possession.

It was accepted, for the purposes of the litigation, that the documents in question attracted legal advice privilege at the time they came into existence (and were not offside by operation of the iniquity exception). The question was whether legal advice privilege subsisted notwithstanding the dissolution of Anabus. At first instance, Master Clark held that it did, distinguishing the decision of the Upper Tribunal in Garvin Trustees Ltd v The Pensions Regulator [2014] to the contrary.

The investors appealed, challenging whether Master Clark had correctly distinguished Garvin. However, the Court of Appeal (then comprising Sir Brian Leveson P, Lewison LJ and Floyd LJ) expressed concerns as to whether Garvin had indeed been

correctly decided. They stopped the clock and acceded to Dentons’ application for permission to serve a respondent’s notice taking the point. In the meantime, Sir Brian Leveson retired, and Hamblen LJ was brought on in his place.

The reconstituted court considered the following questions:

• What happens to legal advice privilege attaching to communications between a company and its lawyers, once that company has been dissolved and the Crown has disclaimed all interest in its former property? (para 1)

• More generally (para 3), ‘legal advice privilege having attached to a communication by reason of the circumstances in which the communication was made’, does the communication remain privileged unless and until privilege is waived, or is the privilege lost ‘if there is no person entitled to assert it at the time when a request for disclosure is made’?

Setting the ground rulesLewison LJ kicked off by considering the rationale for legal advice privilege. Quoting Lord Scott in the landmark case of Three Rivers, he held that ‘legal advice privilege should be given a scope that reflects the policy reasons that justify its presence in our law’: namely, that you must be able to consult your lawyer in confidence, secure in the knowledge that what you tell your lawyer will never be revealed without your consent.

This phase continued with a review of the authorities in support

InsIghts by PennIngtons Manches cooPer

‘The authorities were clear that once privileged, always privileged: it would undermine the purpose of privilege if a lawyer had to qualify their assurance of confidentiality to the client.’

Clare Arthurs and Nicole Finlayson stand on the touchline to witness privilege bouncing back

The Commercial Litigation Journal 3


November/December 2019

of this principle, described by Lord Taylor of Gosforth CJ in R v Derby Magistrates Court [1995] as ‘a fundamental condition on which the administration of justice as a whole rests’. The authorities were clear that once privileged, always privileged: it would undermine the purpose of privilege if a lawyer had to qualify their assurance of confidentiality to the client.

Lord Hoffman in R v Special Commissioner of Income Tax, ex parte Morgan Grenfell & Co Ltd [2002] characterised privilege as a fundamental human right (para 7):

… a necessary corollary of the right of any person to obtain skilled advice about the law. Such advice cannot be effectively obtained unless the client is able to put all the facts before the adviser without fear that they may afterwards be disclosed and used to his prejudice.

The client must be secure in this knowledge at the time the communication is made.

The Privy Council had also made clear that it is the documents/communications themselves that are privileged, because they were created for the purpose of giving or receiving legal advice (B v Auckland District Law Society [2003]). Only voluntary production destroys the privilege: if they are not produced voluntarily, production cannot be compelled. According to the Supreme Court in R (Prudential plc) v Special Commissioner of Income Tax [2013] at para 17, if a document qualifies for privilege, that privilege is absolute unless the client waives it, statute overrides it, the iniquity principle applies, or another miscellaneous exception applies (issues surrounding testamentary capacity, for example).

Marking the pitchThe investors accepted that legal advice privilege is absolute, provided that the relevant communication falls within the ambit of legal advice privilege. What then are the boundaries of legal advice privilege?

Touch judge Lewison ruled that the boundaries must be determined in accordance with the underlying policy. As a general rule privilege attaches to

communications at the time they are made, and remains unless the client consents to its waiver. However, where a client consults their lawyer with a criminal, fraudulent or iniquitous purpose, the communication does not attract privilege at all.

Therefore (para 28):

… the boundaries of legal advice privilege, within which it is absolute

unless and until waived, are that the communication in question must be a communication between lawyer and client, made in connection with giving or receiving legal advice, otherwise than for an iniquitous purpose.

Extra time? Successors and othersThe Court of Appeal next turned its attention to whether privilege can be ruled ‘out’ for any other reason.

It is established law that privilege does not cease on the death of a living person (Bullivant v Attorney General for Victoria [1901]): absent a waiver, the privilege ‘remains’ (para 34). The deceased’s personal representatives have the power to waive privilege, but it is in the public interest for a testator’s provisions and motivations to remain confidential after their death.

What happens if the client goes bankrupt? In Avonwick Holdings Ltd v Shlosberg [2016], the Court of Appeal held that privilege did not pass to the trustee in bankruptcy of a person to whom it belonged prior to their bankruptcy. Privilege is not property; it is a personal right of the individual, attached to the documents/communications in question.

On the touchline? The next boundary that the investors sought to test was the proposition that privilege, as a right, must belong to someone; and if there is no legal person

who is capable of asserting legal advice privilege, then the privilege ceases to exist.

Despite summoning up a dream team of authorities and eminent judges, the investors failed to convince the Court of Appeal of this argument. The right (ie the privilege) is created at the time the communication is made. The immunity from production thus attaches to the communication.

Once the client ceases to exist, the only remaining question is whether there is anyone who has the right to waive it. To hold that privilege is lost if there is no person entitled to assert it would (para 47):

… amount to a retrospective redrawing of the boundaries of legal advice privilege in a particular case. This subverts the policy that the boundaries must be clear and immutable at the time when the communication is made…

Collapsing scrumUnable to reach the try line on that argument, the investors attempted a secondary line of attack: contending that where the court is called upon to consider whether privilege applies to a novel situation, there is a policy choice to be made. The court needs to find the (Three Rivers, para 86):

… proper point of balance between two opposing imperatives, making the maximum relevant material available to the court… and avoiding unfairness to individuals by revealing confidential communications between their lawyers and themselves…

Three Rivers was authority that privilege should be ‘strictly confined within the narrowest possible limits consistent with the logic of its principle’. More recently, in Prudential, the Supreme Court refused to extend the scope of legal advice privilege to legal advice

The investors accepted that legal advice privilege is absolute, provided that the relevant communication

falls within the ambit of legal advice privilege.

4 The Commercial Litigation Journal



given by accountants, showing that the law does not favour extending legal advice privilege to the greatest possible extent.

Policy, the investors argued, came down on the side of refusing to extend privilege to a defunct corporation. First, unlike the death of an individual,

a company’s dissolution is under its own control. Secondly, by the time a corporation is dissolved, its affairs should usually have been fully wound up (solvently or otherwise), and any overlooked assets will vest in the Crown as bona vacantia: there is no estate to be protected for any beneficiaries. Neither does it have any

goodwill or reputation to protect, or a moral obligation to any survivors. Thirdly, there is no reason to believe its human representatives would be deterred from being candid with their legal advisers by a conclusion that privilege does not survive the dissolution of the company.

Unfortunately for the investors, Lewison LJ kicked this idea firmly into touch too. Privilege attaches to the communication at the time when it is made. It is not a question of extending the scope of privilege, but of extending the circumstances in which privilege, once attached to a communication, ceases to apply.

The law’s ‘firm position’ is that privilege will only cease if waived by the client or overridden by statute (para 52):

Derby Magistrates holds that the balance was struck once and for all in the 16th century; and is insistent that no further exceptions be made…

The investors’ argument came very close to the argument that privilege comes to an end when the client no longer has a ‘recognisable interest’ in it. This argument was rejected in Derby Magistrates and Nationwide Building Society v Various Solicitors [1999] because it undermines the principle that the lawyer must be able to assure their client that the communications covered by legal advice privilege will never be revealed unless they consent. In Derby Magistrates, Lord Taylor was insistent that no exceptions to the ‘once privileged, always privileged’ principle should be created; so the dissolution of a company cannot become an exception.

Finally, what would the knock-on consequences be if an exception was made in the case of a dissolved corporation? Creating exceptions would undermine the policy of certainty underpinning legal advice privilege.

One last tryHeading towards the 80th minute, the Court of Appeal turned its attention to the question of whether there was anyone who could waive privilege in the dissolved company’s documents.

Anabus was a dissolved Cypriot company, which meant that the Companies Act 2006 did not apply. The equivalent Cypriot legislation provides that when a company is dissolved, all property and rights vested in or held on trust for it immediately before its dissolution shall be deemed to be bona vacantia and accordingly belong to the Republic of Cyprus.

It was common ground both that Anabus’s assets situated in the UK are governed by English law, and that legal advice privilege should be treated as territorially limited to England and Wales. Because domestic

The investors’ argument came very close to the argument that privilege comes to an end when the client no longer has a ‘recognisable interest’ in it. This argument was rejected in Derby Magistrates and Nationwide.

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legislation does not apply, common law determines whether or not anything passes to the Crown as bona vacantia: a prerogative right which entitles the Crown to all personal property that has no other owner, by paramount title rather than as a successor in title.

Dentons argued that privilege passed to the Crown as bona vacantia at common law. The policy underlying privilege means that the Crown is to be treated as a successor in title, even if technically it might not be. On that basis, the legal advice privilege passed to the Crown along with the records and papers to which it attached. Although it disclaimed any interest in the underlying property, the Crown had not waived privilege: it therefore remained intact.

The investors counter-attacked, citing Avonwick to argue that legal advice privilege cannot be described as ‘property’. It is not therefore something which the common law would regard as bona vacantia, and accordingly the Crown acquired no right to either assert or to waive it.

Lewison LJ did not consider this conundrum to be determinative of the case: if the right to waive privilege never passed to the Crown (or, as appeared to be the case, its settled policy is neither to assert nor waive privilege), then there is no one who can or will waive privilege.

On the other hand, if the right to waive privilege did pass to the Crown, it is clear that the Crown had not waived it. The Crown had disclaimed its interest in Anabus’s books and records but was scrupulous to say that privilege was neither waived nor asserted. The investors’ fall-back position that the disclaimer was equivalent to waiver, and destroyed or extinguished privilege, was thus also dismissed.

TMO: GarvinThe Court of Appeal concluded the match by reviewing the decision in Garvin. In Garvin, the Upper Tribunal found that legal professional privilege did not survive the dissolution of a Northern Irish corporation.

In that case, Herrington J had taken as his starting point the proposition that the company itself could not assert the privilege

because, having been dissolved, it no longer existed. In order to assert any rights it would need to be restored to the register, and the relevant time limit had expired. Moreover, the Crown had not asserted its right to the legal advice

privilege which Herrington J held had vested in it.

Lewison LJ showed Garvin the red card. Herrington J had not referred to Derby Magistrates, or discussed the policy and public interest which underpins legal advice privilege at all: it was not a question of who can assert privilege, but of who can waive it, and whether they have done so. He noted though that Garvin might be right on the facts, but for different reasons. The liquidators of the company had already passed documents to an associated party without imposing any restrictions on the use to which he could put them, meaning privilege had been lost before the dissolution.

He therefore overruled Garvin, and held that the Master was right to refuse to order disclosure (but again, for different reasons).

Extra time: costsThe investors sought to challenge Master Clark’s order that they pay 80% of Dentons’ costs, on the basis that Dentons, having asserted privilege on behalf of the non-existent client, should not have actively contested the application. The Court of Appeal kicked this argument firmly into touch: both Nationwide and Morgan Grenfell are authority that it is the lawyer’s duty to assert privilege. If they incur costs in so doing, they are doing no more than fulfilling that duty.

Moreover, Dentons was the only named party to the application notice, and the relief sought included a mandatory order against it. It would be extraordinary if Dentons was not entitled to appear before the court to contest the order. This was a matter of choice, but

by appearing it was not overstepping the limits of its duty. Of course, any solicitors’ firm who chose to participate in such contested proceedings in the absence of an indemnity from its client or former client did so at risk as to costs if it was unsuccessful.

Lewison LJ upheld the original order as to costs.

Match commentaryThis case affirms to all teams that legal advice privilege, once established, remains in existence unless and until it is waived. The Court of Appeal has given clear directions to its judicial linesmen that, following Prudential, the lines remain where they are drawn; but also, that they must remain committed to protecting privilege within those boundaries. Simply put: once privileged, always privileged. n

The Crown had disclaimed its interest in Anabus’s books and records but was scrupulous to say that

privilege was neither waived nor asserted.

Addlesee & ors v Dentons Europe LLP [2019] EWCA Civ 1600Avonwick Holdings Ltd & anor v Shlosberg [2016] EWCA Civ 1138B & ors v Auckland District Law Society [2003] UKPC 38Bullivant v Attorney General for Victoria [1901] AC 196Garvin Trustees Ltd v The Pensions Regulator [2014] UKUT B8 (TCC)Nationwide Building Society v Various Solicitors [1999] PNLR 52R v Derby Magistrates Court ex parte B [1995] UKHL 18R v Special Commissioner of Income Tax & anor, ex parte Morgan Grenfell & Co Ltd [2002] UKHL 21R (Prudential plc & anor) v Special Commissioner of Income Tax & anor [2013] UKSC 1Three Rivers District Council & ors v Governor and Company of the Bank of England (No 6) [2004] UKHL 48


Glosses, explications and reformulations

Alexander Halban is a barrister at Littleton Chambers, practising in international commercial and civil fraud disputes particularly from Russia and the CIS

T he English court’s jurisdiction over a defendant domiciled outside the EU is based on the

court giving the claimant permission to serve proceedings abroad. To obtain permission, the claimant must show:

• a serious issue to be tried;

• a good arguable case that the claim falls within one of the jurisdictional gateways in CPR Practice Direction 6B; and

• that England is the appropriate forum to try the claim.

There has been considerable debate about the ‘good arguable case’ test. The extent of the confusion was recently made clear in a judgment from the Court of Appeal in Kaefer Aislamientos v AMS Drilling Mexico [2019] (para 59 per Green LJ):

A test intended to be straightforward has become befuddled by ‘glosses’, glosses upon glosses, ‘explications’ and ‘reformulations’. In relation to the standard of proof, that which the claimant must establish to found jurisdiction, the courts have referred to a test of ‘good arguable case’, who has the ‘better argument’ or ‘much’ the better argument, the need for ‘reliable’ evidence, the need for ‘clear and precise’ evidence, ‘credible’ evidence, evidence of real ‘substance’, ‘plausible’ evidence, and ‘sufficient’ evidence. Disputes abound over whether the test is a single test or comprised of two parts and, in any event, as to whether the test is absolutist and/or relative.

Background: the ‘good arguable case’ testThe leading case on the ‘good arguable case’ test was formerly Canada Trust Co v Stolzenberg (No 2) [1998]. Waller LJ held at p555 that the test included the relative concept of who had ‘a much better argument on the material available’. That phrase became known as the ‘Canada Trust gloss’ but it only led to further arguments on what the ‘gloss’ itself meant.

The test was reformulated by the Supreme Court in Four Seasons v Brownlie [2017] and Goldman Sachs International v Novo Banco SA [2018]. In Brownlie, at para 7 Lord Sumption explained the test in three limbs (emphasis added):

(i) that the claimant must supply a plausible evidential basis for the application of a relevant jurisdictional gateway;

(ii) that if there is an issue of fact about it, or some other reason for doubting whether it applies, the court must take a view on the material available if it can reliably do so; but

(iii) the nature of the issue and the limitations of the material available at the interlocutory stage may be such that no reliable assessment can be made, in which case there is a good arguable case for the application of the gateway if there is a plausible (albeit contested) evidential basis for it.

This was strictly obiter but it was approved unanimously by the Supreme Court in Goldman Sachs the following

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‘The test is flexible and, in unclear cases, the third limb allows a claimant to establish jurisdiction with plausible evidence, even if the judge cannot resolve disputed issues.’

Alexander Halban reports on clarification by the Court of Appeal of the test for service out of the jurisdiction


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year (at para 9 per Lord Sumption) and is now binding precedent.

However, Brownlie and Goldman Sachs did not provide guidance on how the test works in practice, how it relates to the original ‘good arguable case’ test, nor how it intersects with the ‘much the better of the argument test’. The Supreme Court also did not explain what ‘plausible’ evidence is. The Court of Appeal attempted to answer those questions in Kaefer.

Kaefer: the factsIn Kaefer the claimant sought to recover sums due under a contract for refurbishment of an oil rig. The oil rig was owned by the third defendant (a subsidiary of the fourth defendant) and chartered by the second defendant. The contract was made between the claimant and the first and second defendants. It contained an English governing law clause and an English exclusive jurisdiction clause.

The third and fourth defendants were Singaporean companies and challenged the jurisdiction of the English court. The claimant argued that they were undisclosed principals of the second defendant and thus parties to the contract, so that they could be sued in England under the jurisdiction clause.

The judge (Peter MacDonald Eggars QC, sitting as a deputy judge) set aside permission to serve the proceedings out of the jurisdiction. He found that while the claimant had a ‘good arguable’ case that the third defendant was an undisclosed principal, the defendants had the ‘better argument’ that it was not. He also found that the claimant did not even have a good arguable case in relation to the fourth defendant. The claimant appealed.

Brownlie and Goldman Sachs were handed down after the judge’s decision but before the case came to the Court of Appeal. The Court of Appeal used the case as an opportunity to explain the ‘good arguable case’ and ‘much the better of the arguments’ tests following Brownlie and Goldman Sachs.

The reformulated jurisdiction testIn Kaefer Green LJ (with whom Davis and Asplin LJJ agreed) first explained the key conceptual difference in this area – the different between an absolute test and a relative test. An absolute test is one where, to found jurisdiction, the claimant only has to meet a specific

evidential threshold, without the court considering the relative merits of the parties’ competing arguments. In contrast, a relative test involves the court examining both arguments to see which is stronger. An absolute test is easier to meet and so it is preferred by claimants; a relative test is more stringent and is preferred by defendants.

Green LJ then explained what is involved under each of the three limbs in the new Brownlie and Goldman Sachs test.

Limb (i): a plausible evidential basisIt was clear that the Supreme Court, at least in part, confirmed the relative test, which compares the merits of the parties’ cases. A plausible evidential basis is one in which the claimant has the better argument. The claimant has the burden of proof but the standard is only plausibility, not the balance of probabilities. This was not a new concept created in Brownlie. Plausibility had been used as a guiding principle in the test, comparing the strengths of the parties’ arguments, as far back as Canada Trust.

Other noteworthy points on this limb are the following:

• The burden of proof remains on the claimant.

• The test is not the balance of probabilities, which only applies at a trial when the court can weigh all the evidence, not on an interim application.

• The test is context-specific and ‘flexible’.

• In deciding on jurisdiction, the court must be careful not to express a view on the ultimate merits of the case, even when the issues on jurisdiction closely overlap with the future issues at trial.

• The word ‘much’ in the phrase ‘much the better of the argument’ from Canada Trust should be abandoned (as the Supreme Court had already held).

Finally, what is the name for the new test? In Aspen Underwriting Ltd v Kairos Shipping Ltd [2018] the Court of Appeal had thought that

the test was still a ‘good arguable case’, based on the use of the term in Brownlie. In Aspen the court held that the test fell somewhere between a prima facie case and the balance of probabilities. Ultimately, in Kaefer Green LJ considered that labels do not matter and the name ‘good arguable case’ could still be used, so long as it was clear what the test involved.

Limb (ii): overcoming evidential difficultiesThis limb instructs the court to try to overcome evidential difficulties and reach a conclusion if it ‘reliably’ can. This involves using pragmatism and judicial common sense, especially because jurisdictional challenges are interim hearings without oral evidence, and written evidence invariably has gaps. Judicial techniques to resolve evidential disputes can involve assuming facts in the defendant’s favour and deciding whether jurisdiction is nonetheless made out, or deciding matters only on documentary evidence rather than disputed witness statements. The court also deprecated the practice of some claimants in seeking extensive disclosure from defendants and then using defendants’ refusal to provide it as a ground to establish jurisdiction.

Limb (iii): flexible testWhere the court cannot resolve evidential difficulties to decide who has the better argument, the third limb offers an escape clause. The court can still assume jurisdiction if the claimant has plausible evidence, even if it is contested and the disputes cannot be resolved.

Aspen Underwriting Ltd & ors v Credit Europe Bank NV [2018] EWCA Civ 2590Canada Trust Co & ors v Stolzenberg & ors (No 2) [1997] EWCA Civ 2592Filatona Trading Ltd & anor v Navigator Equities Ltd & ors [2019] EWHC 173 (Comm)Four Seasons Holdings Inc v Brownlie [2017] UKSC 80Goldman Sachs International v Novo Banco SA [2018] UKSC 34Kaefer Aislamientos SA de CV v AMS Drilling Mexico SA de CV & ors [2019] EWCA Civ 10


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This part of the test does not depend on comparing relative merits of the parties’ cases and offers a degree of flexibility in difficult cases. It also avoids the court having to adjourn jurisdictional issues to the trial, which would defeat the point of jurisdictional hearings being resolved early and definitively.

In applying this test to the appeal, the Court of Appeal found that the judge had wrongly considered ‘good arguable case’ separately from ‘a better argument’. However, the judge had in fact carried out the right exercise, in examining the plausibility of the evidence and considering the relative merits of the arguments. The appeal was dismissed.

The reformulated test and jurisdiction clausesKaefer concerned a jurisdiction clause which is governed by Art 25 of the Judgments Regulation. In the recast revised 2012 version of the Regulation this article applies even where none of the parties are EU domiciled. This Article requires a ‘clear and precise’ demonstration that the parties had agreed to the jurisdiction clause. This test had to be melded with the ‘good arguable case’ test. ‘Clear and precise’ was hard to define but it required the evidence to have weight and substance under the first two limbs of the ‘good arguable case’ test; and if the court could not resolve disputes and had to resort to limb (iii), ‘clear and precise’ still indicated the sort of evidence needed.

Undisclosed principals and entire agreement clausesThe substantive issues in Kaefer concerned the doctrine of the undisclosed principal. The claimant sought to demonstrate that the third and fourth defendants were undisclosed principals of the second defendant, the contracting party, so as to bind them to the jurisdiction clause in the contract and allow them to be sued on it in England. As above, the judge’s conclusion that neither defendant was an undisclosed principal was upheld.

The Court of Appeal also considered an important issue as part of its discussion: whether the doctrine of the undisclosed principal applies where the contract clearly defined the parties to it and, in

particular, where it contains an ‘entire agreement’ clause. This issue had also been decided in Aspen, where it was held that if a contract specifies particular parties to it, there is no scope for the doctrine of the undisclosed principal. This was slightly doubted in Kaefer as setting too high a standard: otherwise every contract which defined its parties would exclude undisclosed principals. Nonetheless the ‘entire agreement’ clause in the contract in Kaefer was an important indicator that the parties had decided exclusively on who were contracting parties and principals – although the presence of this clause would not entirely remove the possibility that an undisclosed principal could be found in some cases.

However, this does not appear to be the last word on this subject. Just weeks after Kaefer was decided, the doctrine of the undisclosed principal arose at trial in Filatona Trading Ltd v Navigator Equities Ltd [2019], also in the context of a contract with specified parties and ‘entire agreement’ clauses. However, Teare J found on the facts that the contract did not exclusively and exhaustively define the parties to it, and one of the parties was the agent for an undisclosed principal. Filatona is itself currently under appeal.

Conclusion: is the jurisdiction test resolved? Much of the confusion in earlier cases on the jurisdictional test had been about phraseology and labels. As the Court of Appeal remarked, labels do not matter. The test can still be called the ‘good arguable case’ test so long as it is properly understood and applied. Kaefer provides extensive discussion of how the test developed and how it is to be applied.

The reformulated test recognises that there are limitations to what can be achieved at an interlocutory hearing with evidence on paper. The test is flexible and, in unclear cases, the third limb allows a claimant to establish jurisdiction with plausible evidence, even if the judge cannot resolve disputed issues.

However, Kaefer may not be the final word on the subject. Aspen has been appealed to the Supreme Court on the issue of jurisdiction. In many respects Aspen and Kaefer are sister cases, deciding very similar issues on the evidential standard in the jurisdiction test in the context of jurisdiction clauses (and coincidentally both concerning the doctrine of the undisclosed principal). The appeal in Aspen was heard by a panel of seven Supreme Court justices on 4-5 November 2019 and is likely to become the leading case on these issues when judgment is handed down. n

The key points to take away from Kaefer are:

• Thejurisdictionaltestcanstillbecalleda‘goodarguablecase’butinlargepart itcomparestherelativemeritsoftheparties’casesonjurisdiction.

• ThejudgehearingajurisdictionalchallengemustdecideiftheclaimanthasaplausibleevidentialbasisfortheEnglishcourthavingjurisdiction.Theclaimant musthavethebetterargumentthanthedefendanttomeetthisthreshold.

• Ifthereisafactualdisputerelevanttojurisdiction,thejudgemustaimtodecidethematterifhe/shereliablycan.Thiscanbedifficultastheevidenceisonlyonpaperandthereareinvariablygapsattheearlystageofajurisdictionchallenge.Techniquestodecidedisputedissuesinvolveconsideringdocumentaryevidenceonlyorassumingfactsinfavourofonepartyortheother.Thejudgeshouldbecarefulnottoexpressviewsontheultimatemeritsofthecase.

• Ifthejudgecannotresolvethefactualdisputes,he/shecanfindjurisdictionif theclaimanthasplausible,butcontested,evidence.Thisaddsaflexibleelement tothetest,allowingthecourttotakejurisdictioninaborderlinecase.

• Theothertwopartsofthejurisdictiontest–aseriousissuetobetriedandEnglandbeingtheappropriateforum–arenotaffectedbythisjudgmentandstillneedtobesatisfiedtoobtainpermissiontoserveproceedingsoutofEngland.

Summary

The Commercial Litigation Journal 9November/December 2019

Oral agreements: a formula for uncertainty

Tamsin Baird is a senior associate in the disputes team of Herbert Smith Freehills LLP

A recent High Court judgment has provided a useful reminder of the importance

of ensuring that any agreement is clearly documented and signed so that there is no doubt that its terms are binding. The court rejected a company’s claim for commission for the introduction of a sports sponsorship opportunity on the basis that there was no binding contract between the parties. However, the company’s claim for unjust enrichment in respect of services provided in facilitating the sponsorship deal was allowed.

BackgroundIn AMP Advisory & Management Partners AG v Force India Formula One Team Ltd [2019] the defendant, a Formula One motor-racing team, entered into a major sponsorship agreement with an Austrian water company (BWT). The claimant, a sports marketing company, claimed to have introduced the sponsorship opportunity to the defendant and to have reached an agreement pursuant to which it would receive a percentage of the net receipts under the sponsorship agreement.

On 20 February 2017, the claimant’s representative, Mr Ramos, had lunch with the defendant’s team principal, Dr Mallya, at Dr Mallya’s home. There was a significant factual dispute as to what was said at this meeting. While it was common ground that Mr Ramos referred to the potential sponsorship opportunity, Dr Mallya’s evidence was that he did not have any discussion about commission. Early the next day, Mr Ramos sent

the defendant’s sporting director a copy of a mandate agreement setting out payment terms (the mandate agreement).

The mandate agreement provided that if the defendant concluded a sponsorship agreement for the 2017 Formula One season with the (unnamed) sponsor, the defendant would pay a commission of 15% of the total net cash sponsorship fees up to €12.5m and 12% on the sponsorship fees in excess of that amount. The mandate agreement provided that it would ‘take effect upon signature’ but it was never executed.

Over the next few days, the claimant continued to have dealings with both BWT and the defendant. The sponsorship agreement between the defendant and BWT was entered into on 13 March 2017.

The claimant brought proceedings against the defendant seeking a percentage of the net receipts under the sponsorship agreement (which was worth around €74m over its three-year term). The claimant’s primary case was that the conversation on 20 February 2017 between Mr Ramos and Dr Mallya constituted a binding oral contract between the parties under which the defendant agreed to pay a reasonable commission to the claimant if the sponsorship agreement was concluded.

In the alternative, the claimant relied on certain WhatsApp messages sent by the defendant’s commercial director to Mr Ramos to support its case that the parties had entered into a contract on the terms of the mandate agreement and had waived the requirement for that agreement to be signed.

contract

‘The question was whether the parties’ words and conduct, when viewed objectively, led to a conclusion that they intended to create legal relations and had agreed all the essential terms for the formation of the contract.’

Tamsin Baird analyses a judgment illustrating the dangers of oral agreements


contract


Finally, if there was no contract, the claimant claimed a quantum meruit on the basis that the defendant had been unjustly enriched through the provision of the services by the claimant.

Decision Contractual claims The High Court (Moulder J) rejected the claimant’s claim for a commission on the basis that there was no binding oral or written agreement between the parties. Moulder J noted the general principles to be applied in determining whether or not a contract has been concluded. The question was whether the parties’ words and conduct, when viewed objectively, led to a conclusion that they

intended to create legal relations and had agreed all the essential terms for the formation of the contract. Evidence of the subjective understanding of the parties was admissible in so far as it tended

to show whether objectively an agreement was reached. Evidence of the parties’ subsequent conduct could also be taken into account, as the court will have regard to the whole course of the negotiations.

In respect of the alleged oral agreement said to have been formed on 20 February 2017, Moulder J held that, based on her assessment of the evidence, it was likely that Dr Mallya did say words to the effect that he was fine with the principle of

paying an introduction fee. However, when viewed objectively, the verbal exchange between Dr Mallya and Mr Ramos during the course of that lunch was not intended to be legally binding.

Moulder J accepted the claimant’s submission that there was no reason why a legally binding contract could not be formed in an informal social setting. Nevertheless, she considered that the social nature of the meeting was a factor to take into account as was (more significantly) the fact that Dr Mallya knew that Mr Ramos had no prior experience or track record as a sponsorship agent.

Further, Moulder J held that the subsequent email and WhatsApp exchanges between the parties did not support the inference that a binding oral agreement had been reached. In particular, the sending of the draft mandate agreement to the defendant and the repeated requests for it to be signed suggested that the parties did not intend to be bound by their oral statements. There was no indication in subsequent communications that the

When viewed objectively, the verbal exchange between Dr Mallya and Mr Ramos during the course of the lunch was not intended to be legally binding.

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contract


mandate agreement was simply to give effect to the oral agreement. In view of the above, Moulder J found that no binding contract to pay a commission was formed orally at the 20 February meeting.

In respect of the claimant’s alternative case, Moulder J held that the parties did not enter into a binding contract on the terms of the mandate agreement. She considered the specific WhatsApp messages relied upon by the claimant against the background context in which they were sent, and she also had regard to the subsequent communications between the parties. She found that the words used in the WhatsApp messages would not be understood by a reasonable person to indicate that the parties had intended to create legal relations.

Moulder J rejected the claimant’s submission that, given the need for the sponsorship deal to be concluded exceptionally quickly in advance of the start of the 2017 Formula One season, the parties had agreed to press ahead on the terms of the mandate agreement and had agreed to waive the requirement for the mandate agreement to be signed. She confirmed that an unequivocal agreement to waive a requirement for a signed agreement can in principle be inferred from communications between the parties. However, in this case, the evidence showed that there was no such unequivocal waiver. Instead, the repeated insistence for the agreement to be signed supported an inference that neither party had waived that requirement.

Unjust enrichment claimMoulder J allowed the claimant’s claim for unjust enrichment in part. Following a lengthy assessment of the evidence, she concluded that a third party and not the claimant had introduced the sponsorship opportunity to the defendant. Therefore, the claimant could not claim a quantum meruit based on unjust enrichment for introducing the sponsorship opportunity.

Nevertheless, Moulder J was satisfied that the claimant had made a contribution towards facilitating the sponsorship deal (albeit of a limited nature) and that the provision of these

services constituted an enrichment of the defendant at the expense of the claimant.

In considering whether such enrichment was unjust, Moulder J applied the principles set out in MSM Consulting Ltd v United Republic of

Tanzania [2009], which considered the circumstances in which the court would impose an obligation to pay for services provided in anticipation of a contract that did not materialise. She held that the services provided by the claimant were not of a kind which would normally be given free of charge. Further, the defendant knew that the services were not intended by the claimant to be given gratuitously. Finally, while the claimant sought from the outset to have a signed agreement, this was not a case where the claimant took the risk that it would only be compensated if there was a concluded contract. She held that the claimant provided the services in circumstances where it was led to understand by the defendant that it would be compensated. In the circumstances, Moulder J held that the enrichment in the form of the provision of the services was unjust and the defendant was obliged to pay for the benefit it derived from those services.

The test to be applied in assessing the value of the benefit received by the defendant was the objective market price for those services. On the basis of the limited valuation evidence before the court, Moulder J found that the objective value of the benefit of the services provided by the claimant to the defendant was £150,000.

CommentThe decision highlights the importance of clearly documenting and signing any agreement to ensure there is no doubt that its terms are

binding. A party seeking to rely on an oral contract will always face uncertainty, particularly in light of what Moulder J referred to as ‘the unreliability of the human memory’. It was clear that she found much of the witness evidence in the

case to be of limited assistance. Instead, she placed weight on the contemporaneous documentary evidence.

The decision also highlights the importance of subsequent communications between the parties when seeking to establish an earlier binding contract entered into orally or in correspondence. Parties should ensure that any such communications reflect and confirm the earlier agreement. In particular, if providing a formal contract for signature in these circumstances, it should be made clear that its purpose is merely to give effect to the earlier binding agreement.

Finally, the decision serves as a reminder that even where no contract is found to exist, this does not mean that no legal rights have been created. In this case, the claimant’s unjust enrichment claim was a hollow victory as it was awarded only a fraction of the value of its commission claim (circa €9m). However, had the claimant been able to prove that it was responsible for the introduction of the sponsorship opportunity, an award of quantum meruit on the basis of unjust enrichment may well have been similar to the value of its commission claim. n

Following a lengthy assessment of the evidence, Moulder J concluded that a third party and not the

claimant had introduced the sponsorship opportunity to the defendant.

AMP Advisory & Management Partners AG v Force India Formula One Team Ltd [2019] EWHC 2426 (Comm)MSM Consulting Ltd v United Republic of Tanzania [2009] EWHC 121 (QB)


On a wing and a prayer

Alison Oldfield is a partner in real estate dispute resolution at Eversheds Sutherland

I n the current climate of political and economic uncertainty, organised protest and direct action from

campaigners is a fact of life. A series of cases have looked at the scope of court orders which can be sought by those affected. Now another decision has been added to the flock: Canada Goose UK Retail Ltd v Persons unknown [2019]. The case involved another application for an injunction to stop disruption from campaigners and it had some important things to say about the court’s approach to those sorts of applications, particularly those against unnamed individuals.

Canada Goose: the factsCanada Goose is a clothing retailer which, in November 2017, opened a UK store in Regent’s Street, London. Among the items on sale were products manufactured using fur and down. As a consequence, it became the target of protest by animal welfare campaigners.

In November 2017 Canada Goose issued an injunction application to stop various aspects of the protestors’ activities. The application was issued against:

… animal rights protestors/activists [who] campaign against the manufacture and/or sale of Animal Products including under the brand ‘Canada Goose’ and campaign against the sale of Animal Products by the First Claimant [being Canada Goose] and seek to persuade members of the public to boycott the Store until the First Claimant ceases the lawful activity of selling Animal Products.

At the initial hearing (which took place without notice to the protestors) the judge granted the injunction, banning a long list of activities including

threatening behaviour, trespass and obstructing access to the premises. At the subsequent on notice hearing in December 2017 the injunction was continued with some limited amendment. The number of individuals who could demonstrate in ‘exclusion zones’ (which had been established by the original injunction) was increased from 8 to 12 and the use of loudhailers in the vicinity of the store was permitted during specified limited periods.

Also, at the second hearing, the People for the Ethical Treatment of Animals Foundation (PETA) successfully obtained an order to be joined as a party to the proceedings. At that point the proceedings were put on hold and matters effectively fell into abeyance. Then, in December 2018, Canada Goose made an application for summary judgment against both persons unknown and PETA seeking a final, permanent injunction.

The perils of falling (fowl) of court processThe first difficulty which Canada Goose encountered in obtaining summary judgment was that it was unable to demonstrate that the claim form in the proceedings had been validly served on any of the defendants. True the injunction had been served on protestors on many occasions since it was granted; and true the proceedings must have come to the attention of PETA because it proactively sought to be made a party to the litigation. But none of that, said the judge, met the requirements of CPR 6 about service of the claim form.

Canada Goose’s attempt to overcome this difficulty by seeking a retrospective order dispensing with service was also rejected by the judge. Its alternative strategy was to ask for the earlier order

InjunctIve relIef

‘There is no doubt that the Canada Goose judgment provides pause for thought for anyone who is considering an application for an injunction against unnamed individuals.’

Alison Oldfield considers the lessons to be learned from the Canada Goose decision


InjunctIve relIef


– providing for service of the original injunction order by alternative means – to be amended so as to also apply to the claim form. It claimed that could be done using the court’s ‘slip rule’ under CPR PD 40B para 4.2.

Again, the court refused. There was, it said, an important distinction between orders that the court made but which were not correctly recorded and orders that the parties consider the court should have made but were not. The slip rule could facilitate correction of the former but not the latter.

The unfortunate consequence of this outcome was that the claim form had never been validly served. And by then the four-month deadline (under CPR 7.5) for doing so had long since passed.

Strictly speaking that might have been an end to matters. But the court then went on to consider the merits of Canada Goose’s application for summary judgment. And the conclusions it reached offer useful guidance for anyone considering a similar application against ‘persons unknown’.

The summary judgment applicationIf Canada Goose was to successfully obtain summary judgment it would need to persuade the judge that the criteria set out in CPR 24.2 had been met; in other words that, on the evidence, the defendants had no real prospect of defending the claim and there was no other reason why it should go to full trial. In this case of course that also involved a consideration of whether it was appropriate to grant Canada Goose a final, permanent injunction on the basis of the summary evidence.

But who were the ‘defendants’ whose prospects of success were being assessed? The identity of the second defendant was of course straightforward – PETA had been specifically named. It was the definition of the first defendants which the judge found more problematic.

There was no difficulty in principle with granting an injunction – whether interim or final – against ‘persons unknown’ as a category of defendant. The case of Bloomsbury Publishing Group Ltd v News Group Newspapers Ltd [2003] (involving the circulation

of a new Harry Potter book in breach of copyright) confirmed that.

It was the breadth of the category of individuals who could be considered first defendants in the proceedings which troubled the judge. He was concerned that the definition was too wide. Not only could it technically include individuals who carried out

protests nowhere near Regent Street, but nothing about the definition required or assumed any actual wrongdoing on the part of the individuals concerned.

The Canada Goose proceedings flew swiftly in after the Court of Appeal decision in Boyd v Ineos Upstream Ltd [2019]. There too the court had been asked to grant an interim injunction against unnamed individuals who were engaged in protestor activities; in that case anti-fracking campaigners.

The Court of Appeal in Ineos had followed the principle established by Bloomsbury Publishing that an injunction could be granted against persons unknown. The concern there was that, if unnamed individuals were to be bound by the order, it must be sufficiently clear and precise in scope.

In his judgment in Ineos Longmore LJ suggested that, before granting an injunction to prevent threatened unlawful activities by unnamed defendants, a court should be satisfied on six points:

• there must be a sufficiently real and imminent risk of a tort being committed to justify the injunction;

• it is impossible to name the persons who are likely to commit the tort unless restrained;

• it is possible to give effective notice of the injunction and for the method of service to be set out on the order;

• the terms of the injunction must correspond to the threatened tort and not be so wide that they prohibit lawful conduct;

• the terms of the injunction must be sufficiently clear and precise as to enable persons potentially affected to know what they must not do; and

• the injunction should have clear geographical and temporal limits.

An important consideration which Longmore LJ had in mind when he suggested the six criteria was the potential impact which any injunction may have on the protestors’ rights under the European Convention on Human Rights. In particular the rights under Art 10: freedom of expression; and Art 11: freedom of assembly and freedom of association.

True, Ineos (and now Canada Goose) also enjoyed the right to respect for private life (Art 8) and the right to peaceful enjoyment of possessions (Art 1 First Protocol) under the Convention. When it came to striking a balance between competing rights though the law was clear. Any interference with rights of free speech and assembly must be justified because it was necessary, not just expedient. For similar reasons, and given its potential to impact on free speech, an injunction against harassment must not go further than was absolutely necessary to prevent truly oppressive, persistent and unpleasant behaviour.

So where did all this leave Canada Goose and its application for summary judgment?

The first problem for Canada Goose was that, having considered Longthorne LJ’s six-point criteria, the judge, Nicklin J, concluded that the definition it had adopted for ‘persons unknown’ did not meet the test. On the contrary the description had the potential to capture both the guilty and the innocent. And that, said the judge, was unacceptable:

It is fundamentally wrong in principle to grant judgment in a civil claim against a person when the Court is

It was the breadth of the category of individuals who could be considered first defendants in the

proceedings which troubled the judge.


InjunctIve relIef


not satisfied s/he has committed or is threatening to commit any civil wrong.

Having expressed reservations about the scope of individuals potentially caught by the injunction, the judge went on to consider whether the evidence supported summary judgment in any event. And unfortunately for Canada Goose, he concluded it did not.

As far as PETA was concerned, he quickly came to the conclusion that Canada Goose could not show that it had done anything unlawful. It followed that it was also unable to demonstrate that PETA had no prospect of defending the claim.

The judge was also unconvinced that the evidence against the unnamed first defendants met the summary judgment test. He acknowledged Canada Goose’s evidence of serious impact from the protestors’ activities on three particular occasions. So too the evidence of criminal activity and arrests on these and a number of other occasions. In respect of the vast majority of incidents (132) referred to in evidence however, he did not reach a conclusion about whether breaches of criminal or civil law had occurred. He expressed the view that Canada Goose had included a number of incidents in evidence which he regarded as ‘trivial’ and also noted the lack of any witness evidence to support the claim that individual staff members felt harassed by protestors.

The upshot was, said the judge, that Canada Goose was seeking to utilise the expedient of suing ‘persons unknown’:

… without making any attempt to discriminate between those against whom there is evidence of wrong doing and those against whom there is not.

The judge also concluded that specific elements of the injunction were not justified. He said that the activities of the protestors had not crossed the line from the exercise of free speech into the sort of oppressive, persistent and unpleasant conduct necessary to justify interfering with Article 10 rights and granting an injunction against harassment. So too the restriction on the number of protestors who could demonstrate near the store was not justified. It was not, he concluded, for a public authority to decide what numbers of protestors are ‘enough’ or ‘sufficient’.

Finally, he also questioned why, as the proceedings developed and the identity of some of the protestors became clearer, Canada Goose had chosen not to address some of these difficulties by adding named defendants to the proceedings. On its own evidence it could have named 37 protestors and identified up to 121. He was also unimpressed by Canada Goose’s suggestion that the cost of adding such a significant number of defendants was not justified, nor that there was a benefit to the defendants of avoiding any cost risk in the proceedings by remaining unnamed.

Those considerations did not alleviate Canada Goose’s paramount obligation to name defendants where they could be identified, as promptly as practicable.

So, the application for summary judgment failed. Furthermore, said the judge, the interim injunctions could not continue in their current form. The failure to serve the claim form within time was a critical problem. That aside though there were fundamental issues with whether the claim could be maintained against the category of people identified as ‘persons unknown’ and those individuals who were known to Canada Goose should be joined as named defendants.

Is the goose cooked for interim injunctions against persons unknown?There is no doubt that the Canada Goose judgment provides pause for thought for anyone who is considering an application for an injunction against unnamed individuals – particularly in the context of protest or campaigns.

It might also be tempting to conclude that it indicates a shift in favour of defendants in injunction applications.

In truth though Canada Goose is less a departure and more a helpful reminder of the core principles which should underpin any injunction application:

• Don’t wing the identity of the defendant: the scope of ‘persons unknown’ defendants must be limited to individuals who are guilty – and not innocent – of unlawful activity.

• Define the banned activity carefully: it is critical to be able to articulate the sort of conduct

which is properly characterised as unlawful and which the injunction justifiably prohibits. Be clear and precise. If there is any risk that the injunction would purport to prohibit conduct which is in fact perfectly lawful it is at risk of being struck down.

• Demonstrate the urgent need: any applicant must be able to demonstrate a real and imminent requirement for an injunction: because unlawful conduct is being carried out and/or because, absent the injunction, it will be committed by the individuals against whom the injunction is sought.

• Don’t forget the end game: as Canada Goose demonstrates, in the heat and light of an urgent injunction application it is easy to overlook the procedural details of the wider court proceedings. As a consequence, the claimant discovered too late the pitfalls of missing the critical deadline for serving the claim form.

• Double-down for the long haul: Canada Goose sounds a note of caution about the resources involved in managing an injunction once the initial order is obtained. Constantly monitoring the identity of individuals who are breaching the order can be costly and time-consuming. The judicial comments in Canada Goose are clear though. If individuals can be identified the safest course of action is to name them and add them to the proceedings; quite apart from the fact that, if an injunction is flagrantly breached, it will important to take action to maintain its credibility. And if the order is to be enforced by contempt of court proceedings, those can only be taken against named defendants. n

Bloomsbury Publishing Group Ltd v News Group Newspapers Ltd & ors [2003] EWHC 1205 (Ch)Boyd & anor v Ineos Upstream Ltd & ors [2019] EWCA Civ 515Canada Goose UK Retail Ltd & anor v Persons unknown & anor [2019] EWHC 2459 (QB)


Sweet success

Ilya Kazi (pictured top) is a partner specialising in electronics, engineering and IT, and Alex Robinson is an associate specialising in life sciences and chemistry at intellectual property firm Mathys & Squire

T he case of Shanks v Unilever plc [2019], which was decided in the UK Supreme Court last month,

has potentially significant implications for every business which engages in research and development (R&D) and files patent applications with UK-based employees named as inventors.

The lawUnder UK law, inventions belong to the employer if made in the course of an employee’s normal duties under the Patents Act 1977 (PA77), s39. There is no obligation to provide any additional compensation in exchange for such inventions. However, the law provides for additional compensation to employees if a patented invention is of ‘outstanding’ benefit to the employer (s40(1) PA77), in which case the employee is entitled to a ‘fair share’ of the benefit (s41(1) PA77). Until now, it was considered unlikely that even highly lucrative inventions would qualify their inventors for additional compensation, with many large companies effectively being deemed ‘too big to pay’ as the income relating to any individual invention would often pale into insignificance against the employer’s overall turnover (Shanks v Unilever plc [2017], at paras 27 and 68 and [2019] at para 50). Only one previous award of compensation had been made, in an unusual case in which the relevant patents had been crucial for the employer in avoiding financial difficulties (Kelly v GE Healthcare Ltd [2009]).

ShanksIn the Shanks case, Mr Shanks was employed by a Unilever subsidiary. The patents on his invention, which concerned glucose-testing technology, were assigned to other Unilever

companies, which then obtained income from licensing the patents to third parties and from the eventual sale of a group company which held the patents. The Supreme Court awarded £2m in compensation based on a net income to Unilever of about £24.3m from the patents. This sum was based on a ‘fair share’ of 5% and an uplift to take into account the time value of money, reflecting the fact that the case had dragged on since 2006 and that the income attributable to the patents had been received between 1996 and 2004.

The Supreme Court’s decision is significant, as the income of £24.3m was held to be an ‘outstanding benefit’ even though it was dwarfed by Unilever’s overall turnover and profits. At first glance, this appears to do away with a ‘too big to pay’ defence for employers and potentially clears the way for more inventors to succeed in obtaining additional compensation.

However, a critical factor in this case was that the subsidiary which employed Shanks did not itself carry out any trading activity but was a research-based service company for the rest of the Unilever group. In this context, the relevant benchmark for determining ‘outstanding benefit’ was not the income of the group as a whole but, instead, the income derived from the Shanks patents relative to other patents generated by the same subsidiary.

Consequences of ShanksThis decision may, therefore, have the biggest implications for companies

Intellectual ProPerty

‘The law provides for additional compensation to employees if a patented invention is of “outstanding” benefit to the employer.’

Kelly & anor v GE Healthcare Ltd [2009] EWHC 181 (Pat)Shanks v Unilever plc & ors [2017] EWCA Civ 2; [2019] UKSC 45

Ilya Kazi and Alex Robinson look at a recent Supreme Court decision with potential impact for business


Intellectual ProPerty


with complex structures. For example, a company with an R&D subsidiary with minimal revenue and a separate main business, perhaps in a more tax-favourable location, may now be exposed to more inventions being deemed ‘significant’. Companies with group structures may, therefore, wish to reassess how their R&D activities are integrated into the group in order to try to minimise exposure.

The commercial circumstances in Shanks were also unusual, as Unilever had not invested heavily in developing the technology and was not interested in entering the glucose-testing market despite its initial research in this area. It was uncommon for Unilever to license or sell its patents instead of commercialising the technology itself, and so the income directly attributable to the patents stood out.

The impact of this case might, therefore, be particularly felt by companies with diverse business activities, as was true of Unilever in this case, in which the circumstances surrounding the patents and related income could be isolated from the wider business to determine their significance. For companies with a more narrowly defined business in one sector, with all of their patents relating to core business activities (eg in the case of pharmaceuticals), it may be that the Supreme Court’s decision does not change much, as it may be harder to isolate the relative benefits of a particular invention from the income of the company as a whole. In such cases, the business will normally also be making serious efforts to commercialise the invention and much of the income may be attributable to other factors such as marketing and distribution strategies, so that it is more difficult to apportion any particular share of the benefit purely to the invention or the patent. However, it is not clear what might happen when, for example, a highly successful invention (eg a blockbuster drug) arises because of a breakthrough after an expensive research programme. It is still less clear what might happen in the case of an invention developed by a team, or if artificial intelligence is involved in the development programme – who might be entitled to compensation in such circumstances?

What is clear is that companies are unlikely to relish the prospect of losing litigation, which may now be more likely in principle even if the circumstances of this case were unusual. It still seems likely that the courts will award compensation only

in exceptional circumstances, but companies may nevertheless face opportunistic litigation in pursuit of lucrative out-of-court settlements.

Many companies already have employee incentive schemes to encourage innovation by paying employees a bonus for work leading to patents. Such schemes are already mandated by law in some countries, for example in France and Germany. It

is arguable that a heightened focus on the value of innovation to companies, and awarding of benefit to inventors for significant contributions, may have positive effects in incentivising staff productivity. Following this judgment, companies employing inventors in

the UK should consider reviewing their arrangements, perhaps to set a framework to define the circumstances in which employees might be paid additional compensation and to reduce the likelihood of inventors resorting to litigation. The award of additional compensation in view of the time factor should also prompt companies to seek early resolution in case of a dispute. n

The Supreme Court’s decision is significant, as the income of £24.3m was held to be an ‘outstanding benefit’ even though it was dwarfed by Unilever’s

overall turnover and profits.

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The Commercial Litigation Journal 17November/December 2019

Time travel

Georgia Fullarton is an associate and Simon Heatley a knowledge development lawyer with Charles Russell Speechlys LLP

T he Jackson reforms of April 2013 ushered in a new era in which the courts will exercise more stringent

case management, with an emphasis on compliance with rules and directions. Adherence with time limits is of paramount importance. One of the key questions that the courts have grappled with is how rigorous a test will apply to applications for extensions of time. In so doing, the courts have drawn a clear line between applications made ‘in time’ and those made retrospectively. In the recent case of Everwarm Ltd v BN Rendering Ltd (Rev 2) [2019], the question arose in the context of compliance with an unless order and whether this blurs the line.

The CPRGenerally, extensions to timings specified by either the Civil Procedure Rules (CPR) or the court may be varied by the following means:

• By agreement between the parties: pursuant to CPR 2.11, the parties may agree between themselves to vary a time limit, unless the CPR, a practice direction or court order provides that such time limit may not be varied. CPR 3.8 is one such provision, which deals with deadlines where a sanction is automatically imposed on a failure to meet them. Where CPR 3.8 applies, the parties may still agree an extension of up to 28 days by prior written agreement pursuant to CPR 3.8(4), provided that this does not put at risk any hearing date.

• By court order: where agreement is not possible between the parties, the party seeking the time extension may apply to the court for an order. Under its general powers of case management pursuant to

CPR 3.1(2)(a), subject to where the CPR provides otherwise, the court may extend or shorten the time for compliance with any rule, practice direction or court order. This can be exercised retrospectively as well as prospectively.

Before seeking to agree a variation in time, a party should always check any relevant court order, the provisions of the CPR and the court guides. CPR 3.8 is not the only restriction on the parties’ ability to agree extensions of time. For example, CPR 29.5 provides that dates fixed by the court for a case management conference, a pre-trial review, the return of the pre-trial checklist, the trial or the trial period cannot be varied between the parties and no other date may be varied if it would have the knock-on effect of varying one of these dates.

Agreement between the partiesForm of agreementThe agreement may take the form of a single document signed by both parties, an exchange of letters between the solicitors concerned or an oral agreement subsequently confirmed in writing by both parties. In Thomas v Home Office [2006], the court made it clear that an oral agreement to vary a time limit should be confirmed in writing by both sides in this way; a letter recording an oral agreement sent by one party to another, which remains unanswered by the recipient, would not be sufficient.

Notifying the courtUpon reaching agreement between the parties to an extension of time pursuant to CPR 2.11 or CPR 3.8(4), the court should be notified as a matter of good practice. In the case of the Commercial Court, this is mandatory for all time variations. Practice Direction (PD) 58

PractIce

‘In Denton, the Court of Appeal issued a strong warning that parties should co-operate and, instead of merely considering the reasonableness of requests, should not unreasonably refuse requests for time extensions or unreasonably oppose applications for relief from sanctions.’

Georgia Fullarton and Simon Heatley measure the extension of time by the judiciary


PractIce


para 7.1 provides that, where the parties in accordance with CPR 2.11 agree in writing to vary a time limit, the claimant must notify the court in writing, giving brief reasons for the agreed variation. Meanwhile, para 15.35 of the Chancery Guide requires notification to the court if the parties agree to extend the time limit

specified in the Notice of Provisional Allocation (Form N149C).

The notification to the court will usually be by way of a consent order. Pursuant to PD 29.6.5, PD 28.4.5 and PD 23A.10.4, the applicant must file at court:

• a draft of the order sought, signed by or on behalf of each party; and

• an agreed statement of the reasons why the extension is sought.

The court may make an order in the agreed terms or in other terms without a hearing or may direct that a hearing be listed. The court may include conditions and specify the consequences of failure to comply with the terms of the order. While an unopposed extension of time that will not impact on any hearing date is likely to result in a straightforward endorsement by the court, it should never be forgotten that it is ultimately a matter of discretion for the court.

When is it reasonable to withhold consent to an extension?In Hallam Estates Ltd v Baker [2014] and Denton v White [2014], discussed below, the Court of Appeal made it clear that an unreasonable opposition to a request for a time extension will likely be penalised in costs. That said,

there may still be circumstances where it is reasonable to withhold consent to an extension. In R (Idira) v The Secretary of State for the Home Department [2015], the Court of Appeal held that, despite the encouragement in Denton for parties to agree reasonable requests for extensions, parties did not have to agree an extension in every case, and most notably where the extension would:

• disrupt the appeal timetable; or

• cause prejudice.

Applying to the courtWhere one party seeks to vary a time limit but has been unable to obtain the consent of the other party, it will need to issue an application to the court. This should be made in accordance with the usual procedure for interim applications contained in CPR 23 and not on an informal footing, as happened in the recent case of Saint Benedict Land Trust Ltd v London Borough of Camden

[2019]. Here, the court made it clear that informal correspondence with the court via email would not be adequate.

The application will need to be supported by robust evidence explaining why the extension is necessary and the reasons for the delay. The application should also be made before expiry of the deadline. The importance of this is highlighted by the courts’ approach to in-time and retrospective applications and the clear dividing line between them.

A brief history of time (extensions) Mitchell robustnessThe tougher stance towards time extensions taken by the courts following the Jackson reforms was made plain in the well-known case of Mitchell v News Group Newspapers [2013]. There the court emphasised that, if a party anticipates missing a deadline, an application to the court for an extension of time should be made promptly and before the deadline has expired to achieve the greatest chances of success.

The court’s decision in Mitchell created the general view that if a party withheld its consent to an extension request, thus forcing the other party to make a formal application to the court, the applicant was likely to find it harder to obtain the time extension requested from the court. It was also accepted that, if a relevant time limit had already expired, defaulting parties could expect to struggle to obtain relief from sanctions.

This position resulted in a slew of truculent behaviour among litigants who took the view that it would make little strategic sense to agree to waive an opponent’s breach, if the court

The Court of Appeal made it clear that an unreasonable opposition to a request for a time extension will likely be penalised in costs.

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was in any event likely to penalise the breaching party, to the benefit of the non-breaching party. As a result, the volume of applications for relief from sanctions as well as applications for extensions of time went up and the volume of court time associated with hearing those applications increased accordingly, drowning the overriding objective in a sea of satellite litigation.

Help from HallamHallam changed the complexion of the post-Mitchell landscape by introducing a greater sense of clarity and focus around the concept of reasonableness in making and accepting requests for extensions of time. In Hallam, Jackson LJ implemented an approach which placed the onus on applicants to make reasonable requests and on respondents to agree such requests.

In considering what factors would prove valuable when assessing the reasonableness or otherwise of a request, Jackson LJ placed an emphasis on factors such as whether the extension sought would negatively impact future hearing dates or otherwise disrupt the conduct of the litigation. In the absence of such factors, the parties were to be encouraged to further the overriding objective by endeavouring to agree reasonable extensions of time and avoiding the need for contested applications and recourse to the courts.

Jackson LJ also took the opportunity to clarify that the Mitchell criteria, which applied to applications for relief from sanctions, did not apply to applications for extensions of time made before the relevant deadline had expired. It remained clear that, in general terms, ‘in time’ applications made before the expiry of the relevant deadline would be treated more favourably than those made after the expiry of the relevant deadline, this being so regardless of whether the relevant application was to be heard after the deadline had passed.

Denton developmentsThe Court of Appeal clarified and amended the Mitchell guidelines in Denton and went one step further in developing Jackson LJ’s concept of reasonableness in Hallam. In Denton, the Court of Appeal issued a strong warning that parties should co-operate and, instead of merely considering the reasonableness of requests, should not

unreasonably refuse requests for time extensions or unreasonably oppose applications for relief from sanctions.

Unless ordersIn Everwarm, the court was required to consider how rigorous a test should apply to an application for a time

extension in the context of compliance with an unless order.

The court had made an unless order requiring the defendant to make a payment into court for security for costs in relation to its counterclaim. The defendant issued an application for an extension of time to comply half an hour before the deadline. The application was heard after the deadline had expired.

The claimant contended that:

• notwithstanding the application, the defendant’s counterclaim was struck out automatically following the defendant’s failure to comply with the unless order; and

• as a consequence of the automatic sanction, the applicable test was whether the court should grant relief from sanctions pursuant to CPR 3.9.

The claimant distinguished Hallam on the basis that that case did not deal with an unless order. The defendant argued that it made no difference that the order in question was an unless order. As the application was made in time, the court’s general power to extend time for compliance with any order (CPR 3.1(2)(a)) applied.

In granting the extension of time, the court was clear that the existence and effect of an unless order did not change the position established in Hallam and other cases. It noted that CPR 3.1(2)(a) does not distinguish between routine court orders and unless orders and that the court applies the overriding objective, however brief the period between the application and the expiry of the deadline.

A word of cautionWhile the court took an approach consistent with existing authority and was unpersuaded that the presence of an unless order should change this approach, practitioners should not automatically assume that any ‘in time’ application will get them over the line

with the court. The granting of all such applications, as an exercise of its general case management powers, remains in the discretion of the court.

When it comes to unless orders, while the CPR makes no distinction between routine and unless orders, since the court is applying the overriding objective, it will no doubt expect particular compliance with unless orders, given their seriousness. In Everwarm, the defendant’s cause was assisted by the fact that it had made bona fide attempts to comply with the order and the court did not consider there to be any real prejudice caused to the claimant by permitting the extension.

While the headline point may be that in-time applications will likely be treated more favourably by the courts, whether or not they concern an unless order, practitioners should not lose sight of the fact that any application should be made expediently and that the supporting evidence will need to demonstrate good reason for both the delay and the extension sought. n

In Everwarm, the defendant’s cause was assisted by the fact that it had made bona fide attempts to

comply with the order.

Denton & ors v White Ltd & ors [2014] EWCA Civ 906Everwarm Ltd v BN Rendering Ltd [2019] EWHC 2078 (TCC)Hallam Estates Ltd & anor v Baker [2014] EWCA Civ 661Mitchell v News Group Newspapers [2013] EWCA Civ 1537R (Idira) v The Secretary of State for the Home Department [2015] EWCA Civ 1187Saint Benedict Land Trust Ltd v London Borough of Camden & anor [2019] EWHC 1433 (Ch)Thomas v Home Office [2006] EWCA Civ 1355


Square pegs and round holes

Gwendoline Davies is head of dispute resolution at Walker Morris

I n the fast-paced world of commercial negotiations, contractual language is often deployed without parties

necessarily appreciating the correct legal meaning, and practical impact, of certain words. However, whether a contractual provision is classed, as a matter of law, as a ‘condition’, a ‘warranty’ or an ‘innominate’ (or ‘intermediate’ – these latter two are interchangeable) term is a technical issue which can have very significant practical and financial implications. The classification of a contractual provision is crucial because it can determine the remedies that will be available in the event of breach.

• If a provision is a condition, then the innocent party will, in the event of a counterparty’s breach, be entitled both to terminate the contract and to claim damages.

• If a provision is a warranty, then an innocent party will only be able to claim damages – it will not be entitled to terminate the contract.

• A provision will be an innominate term if it is neither a condition nor a warranty. Where an innominate term is breached, the remedy or remedies available to the innocent party will depend on the nature and effect of the particular breach. It is trite law that if the breach substantially deprives the innocent party of the benefit of the contract overall, then the remedy will be an entitlement to terminate and to claim damages, as with a breach of condition (see Hong Kong Fir Shipping Co Ltd v Kawasaki

Kisen Kaisha Ltd [1961]). If, on the other hand, the breach is not so significant as to undermine the contract as a whole, then the remedy will be as for a breach of warranty (that is, entitlement to claim damages only).

It is essential that anyone involved in the negotiation, drafting or interpretation of commercial contracts understands the different categories of contractual terms. In particular, where appropriate, it is important that parties are able to decide upon their requirements and then to provide for conditions, warranties and/or innominate terms accordingly within their contractual arrangements.

In the recent Court of Appeal judgment in Ark Shipping Company LLC v Silverburn Shipping (IOM) Ltd [2019], the court provided a cautionary reminder of the different categories of contractual terms, and also clarified the correct approach for classifying terms.

What happened in the case?Ark had leased, by way of an industry-standard charterparty contract, a vessel from Silverburn. The contract included, among other terms, certain obligations on Ark for the ongoing maintenance of the vessel. Several disputes arose between the parties and, in December 2017, Silverburn argued that a specific maintenance obligation was a condition and that Ark had breached it. Silverburn therefore sought to both terminate the contract and claim damages. The Court of Appeal was asked to determine (solely) whether the obligation was a condition or an innominate term. In doing so,

Key terMs

‘A key point for contract negotiators and drafters to appreciate is that, in many cases, a judgement call will be needed as to whether a contractual term should be expressed to be a condition or a warranty, or whether the terms should be innominate.’

Gwendoline Davies explains the importance of categorising contractual terms


Key terMs


the Court of Appeal confirmed that the correct approach as to the classification of contractual terms is as follows:

• Questions as to the classification of contractual terms are a matter of contractual construction and interpretation.

• The correct approach to contractual construction and interpretation is that the starting point must be the wording of a contract itself. The court’s task is to ascertain the meaning of the language which the parties have chosen to express in their agreement when read in the context of the factual background known or reasonably available to the parties at the time of the agreement; but where a term might be interpreted in different ways, the court is entitled to prefer the interpretation which is consistent with business common sense.

• In accordance with earlier Court of Appeal authority in Grand China Logistics Holdings (Group) Co Ltd v Spar Shipping AS [2016], the court should find that a term is innominate unless it is clear on the face of the contract that the term is a condition or a warranty.

• Undertaking a step-by-step analysis in the current case, the court took the following factors into account:

• Wording: the provision in question was not expressed to be a condition.

• Time/interdependence: the provision was not a ‘time clause’, a ‘condition precedent’, nor any other form of interdependent clause on which other contractual obligations relied.

• Drafting: looking at the drafting as a whole, the particular provision was part of a wider clause. It was unlikely that the parties’ intention could have been for just that one element

within the wider clause to be a condition, but it would be too extensive and commercially illogical if all other elements within the clause were also conditions, and that could not have been the parties’ intention.

• Drafting – industry-standard contract: further considering the drafting as a whole, the provision was within an industry-standard contract, which one would expect to expressly specify where a term was meant to be a condition.

• Consequences of breach: the consequences of breach of the provision could range from trivial to very serious. Such a wide range of possible consequences is consistent with a provision not being a condition.

• Ongoing obligation: the provision dealt with an ongoing maintenance obligation. Typically within the industry, continuing obligations as regards the maintenance of vessels are not conditions.

HeldThe Court of Appeal concluded on this occasion that the provision was an innominate term. Consequently (albeit this was not a matter for the Court of Appeal to decide in the current proceedings), an assessment must be made as to whether the remedies available in the event of breach will be as for a breach of condition (termination and damages) or as for a breach of warranty (damages only). Any such assessment will depend upon the particular facts and circumstances of any individual case.

Key takeawaysOverall, in the absence of express wording, the categorisation of contractual terms is a balancing exercise. In accordance with prior authority, the court should generally find that a term is innominate unless it is clear on the face of the contract

that the term is a condition or a warranty; and in making that assessment, the court will take into account the language, structure and scheme of the contract, together with business common sense.

A key point for contract negotiators and drafters to appreciate is that, in many cases, a judgement call will be needed as to whether a contractual term should be expressed to be a condition or a warranty, or whether the terms should be innominate. There is, of course, the advantage of certainty on the one hand; but the flip-side is that it can be undesirable for trivial breaches to carry the consequences of a breach of condition.

As a general guide, where a point is absolutely critical to your business and to the success of the contractual arrangement, such that you would require termination to be an option in the event of breach, it may be best to expressly state within the contract that the term is a condition. Where, however, flexibility will be preferable, the contract should perhaps remain silent as to classification of the term. n

The provision was not a ‘time clause’, a ‘condition precedent’, nor any other form of interdependent

clause on which other contractual obligations relied.

Ark Shipping Company LLC v Silverburn Shipping (IOM) Ltd [2019] EWCA Civ 1161Grand China Logistics Holdings (Group) Co Ltd v Spar Shipping AS [2016] EWCA Civ 982 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1961] EWCA Civ 7


Choosing your friends, and relations

John Flint is a partner in Clarke Willmott’s commercial and private client litigation team

T raditionally the English courts have avoided implying a duty of good faith into commercial agreements,

requiring instead that parties expressly impose such a duty. However, we are now seeing a significant shift in judicial attitudes when it comes to contracts which are considered to be ‘relational’ – that is to say a ‘contract that involves not merely an exchange, but also a relationship between the contracting parties’ (MA Eisenberg, ‘Relational Contracts’ in J Beatson and D Friedmann (eds), Good Faith and Fault in Contract Law (OUP, 1995) 296).

InterpretationBy expanding this interpretation, an increasing number of litigants are finding recourse for what they consider to have been sharp commercial practice but where previously, in the absence of express obligations, no remedies were available. To that extent, it therefore promotes a better and more ethical way of doing business. A relational contract includes many types of contracts. Parties who enter into distribution, franchise or joint venture agreements – as well as those who are entering into long-term commercial agreements involving a high degree of communication, co-operation and predictable performance based on mutual trust and confidence with expectations of loyalty – need to be conscious that an implied duty of good faith may arise.

Relational contractsEssentially good faith can be described as acting honestly in the performance of contractual obligations and being loyal to the bargain. It means acting as much

within the spirit of an agreement and in accordance with a justified expectation rather than the letter of the contract, and being faithful to an agreed common purpose. English law used to only imply a duty of good faith in specific categories of agreements – for example employment contracts and those in relation to fiduciary relationships. Meanwhile, English courts had traditionally been reluctant to accept a role for good faith in commercial agreements.

However, the last five years have seen a number of landmark decisions in the courts for relational contracts.

Yam Seng Pte Ltd v International Trade Corp Ltd [2013] signified a possible shift from the established position. ITC granted Yam Seng exclusive rights to distribute Manchester United branded fragrances under a long-term international distribution agreement between the parties. The dispute arose when the relationship broke down and Yam Seng alleged a number of breaches of contract by ITC, arguing that an obligation of good faith should be implied into the agreement.

In that case Leggatt J implied a duty of good faith into a distribution agreement and indicated that the duty might have a role in commercial contracts, raising expectations that the courts were open to a pervasive duty of good faith being implied more commonly in commercial contracts. It was suggested that good faith obligations would be more likely to be implied in ‘relational’ contracts where there was ongoing interaction (such as joint venture, franchise and distribution agreements). However, such contracts require a high degree of co-operation and loyalty, and frequently a common goal.

DraftIng

‘A general obligation to act at all times in good faith towards a counterparty because the contract was “relational” might fail to have regard to rights and obligations created by the express terms.’

John Flint places a recent decision on relational contracts in context


DraftIng


Since that decision the court arguably started to expand the position. For example, in Bristol Groundschool Ltd v Intelligent Data Capture Ltd [2014], although it did not sit squarely within the examples given in Yam Seng, an agreement to produce training manuals was found to give rise to an implied good faith obligation.

At the centre of the proceedings were two agreements in writing related to materials for the UK Civil Aviation Authority training course for pilots and the second to materials for the EU Joint Aviation Authority training course. The court considered that breach of an implied good faith term was to ‘strike at the heart of the trust which is vital to any long-term commercial relationship’. The judgment made particular reference to Yam Seng, quoting Leggatt J at para 142 as follows:

… many contracts… involve a longer-term relationship between the parties which they make a substantial commitment. Such ‘relational’ contracts, as they are sometimes called, may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements. Examples of such relational contracts might include some joint venture agreements, franchise agreements and long-term distributorship agreements…

The criteria to establish a duty of good faith continues to be explored by the courts.

Recently, in Bates v Post Office Ltd [2019] which involved more than 500 claimant sub-postmasters and the UK Post Office, the High Court ruled in favour of the Justice For Sub Postmasters Alliance over claims the Post Office had abused its position to unlawfully suspend, sack, prosecute and criminalise people who run branch Post Offices over ‘stolen’ money. The judge allowed that far from being a standard business contract, the Post Office and sub-postmasters had a ‘relational’ contract which puts responsibilities on the Post Office to recognise what the judge called their ‘uniquely unequal’ relationship. The ruling says the concept of good faith

means more than just honesty, and also that good faith includes an obligation to ‘refrain from conduct which in the relevant context, would be regarded as commercially unacceptable by reasonable and honest people’ and an obligation of ’transparency, co-operation, and trust and confidence’ (paras 711 and 738 per Fraser J).

This is a good example of the High Court liberally applying duties of good faith to contractual obligations to help achieve what it perceived to be a fair and equitable outcome. The court considered the specific characteristics that would be expected to be present in order to determine whether a contract between commercial parties ought to be considered a relational contract (para 725 per Fraser J):

1. There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract.

2. The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship.

3. The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain.

4. The parties will be committed to collaborating with one another in the performance of the contract.

5. The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.

6. They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.

7. The contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.

8. There may be a degree of significant investment by one party (or both) in the venture. This significant investment may be, in some cases,

more accurately described as substantial financial commitment.

9. Exclusivity of the relationship may also be present.

This was not an exhaustive list and no single factor was determinative, with the exception of the first characteristic: an express term which prevented the implication of a duty of good faith would be conclusive.

Good faithMore recently, submissions based upon an implied duty of good faith failed in UTB LLC v Sheffield United Ltd [2019]. This case concerned an investment and shareholders’ agreement (ISA) between the parties and a disagreement which subsequently arose, leading to the exercise of a call option notice by Sheffield United Ltd (SUL) which offered to buy UTB’s shareholding for £5m. That triggered an entitlement for UTB to serve a counter notice to elect to buy SUL’s shares at the same price. UTB sought to enforce the sale to it at the price of £5m. SUL’s position was that the contract should be declared void or set aside, alternatively that UTB should sell its shares to SUL at the current value of its non-majority shareholding. It stated that UTB had breached an obligation of good faith by seeking to drive SUL out of the joint ownership and by seeking to deprive SUL of its rights under the ISA. SUL’s argument, in part, was that the ISA was a ‘relational’ contract between UTB and SUL, such that as a matter of law there was implied into the contract an obligation on each party to deal fairly and act in good faith towards the other.

The court observed that the law had not yet reached a stage of settled clarity, nor was there binding authority – though there is a body of first instance decisions and dicta in the Court of Appeal that establish various principles. The court considered the Supreme Court decision in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] which reaffirmed the traditional general approach that, however reasonable it may be, a term will not be implied into a contract unless, at the time the contract was made, a reasonable reader of it would consider the term to be so obvious as to go without saying or the term is necessary for business efficacy.


DraftIng


Although these limbs were observed to be theoretical alternatives, in most cases both will be satisfied: a term will be obvious to the reasonable reader because it is necessary to give the contract commercial and practical coherence in accordance with its intended effect.

Relational termsThe court expressed that a ‘relational’ contract is not a contract that involves a long-term relationship between the parties. It is a contract that requires the parties to collaborate in future in ways that respect the spirit and objectives of their joint venture but which they have not specified or have been unable to specify in detail, and which involves trust and confidence that each party will act with integrity and co-operatively. Furthermore, the court stated that a duty to exercise such trust and confidence should necessarily be implied if the contract was to work in accordance with the parties’ reasonable expectations.

The court was cautious of the tendency to substitute, for the question whether a reasonable reader of the contract would consider a term to be necessary or obvious, the question of whether the contract is a ‘relational’ contract. There was a danger in using the term ‘relational contract’ in that it might not be clear about what exactly was meant. The court reflected that there is a great range of different types of contract that involve the parties in long-term relationships of varying types, with different terms and varying degrees of detail and use of language, and to characterise them all as ‘relational contracts’ might be in one sense accurate and yet in other ways liable to mislead.

Clearly not all long-term contracts that involve an enduring but undefined co-operative relationship between the parties will, as a matter of law, involve an obligation of good faith.

Rather than seek to identify and weigh likely indicia of a ‘relational contract’ in the narrower sense, the court considered it preferable to ask first whether a reasonable reader of the contract would consider that an obligation of good faith was obviously meant or whether the obligation was necessary to the proper working of the contract. The overall character and terms of the contract in issue would be highly material in answering that question.

The exact content of any implied obligation of good faith would be highly

sensitive to the particular context of the contract. Of great importance would be the express terms of the contract. A general obligation to act at all times in good faith towards a counterparty because the contract was ‘relational’ might fail to have regard to rights and obligations created by the express terms.

A reasonable approachThe court therefore considered the question was whether a reasonable person, reading the agreement at the time that it was made, with knowledge of the circumstances in which it was entered into and the other agreements made as part of the same transaction, would consider that it was obvious that the parties had to act in good faith in all their dealings with each other or whether such an obligation is necessary to give coherent business effect to the agreement.

In this case the agreement and the associated contractual documents were extremely detailed and professionally (indeed skilfully) drafted. This made it more difficult for the court to imply terms because there was a strong inference that the parties had carefully considered their position.

That inference was less strong if the subject matter of the contract was difficult to set out and made it difficult to agree in advance all the terms that would govern the relationship. In this case the contract did set out two situations where the parties owed each other obligations of good faith. That indicated they did not intend any such obligation to exist outside of the contract. Here the parties had the right to dilute the control of the other and obtain super-majority control. It did not make sense to the court for the exercise of such rights to be subject to an obligation to act in good faith.

Some (but not all) of the characteristics identified in Bates as typical of the sort of contracts where an obligation of good faith is implied were present here: in particular, the contract was (reasonably) long term, though of variable duration; it would function more smoothly if the parties collaborated with each other, which would need a high degree of communication; and there was a significant financial contribution by UTB to the venture.

That said, the agreement did not operate only on the basis that the parties would remain equal owners. The buyout provisions did not depend in any way on

performance of obligations of good faith. The court therefore could not accept that a mutual obligation of good faith was obviously what the parties meant to prescribe – or that such an obligation was necessary to give business efficacy to the agreement. Ultimately the court held that SUL must sell its shares to UTB.

ConclusionGood faith obligations can often be crucial to prevent one party to a bargain taking an unfair advantage over the other by acting solely in its own commercial self interests while technically not breaching the express terms of the contract. Those negotiating potential relational contracts need to be aware of the risk that they may be found subject to implied duties of good faith. If a party entering into a contract does not wish for the duty of good faith to arise it could expressly state this in the contract – this will prevent a duty of good faith being implied into the contract. Where the parties consider what good faith means in advance and define this in their contract, they can enjoy more certainty.

The concept of good faith is still developing and it is a relatively uncertain concept – we await a decision from the higher courts on the subject. The floodgates are not going to open for the idea to be applied in all commercial contracts – specific relational characteristics are necessary. In the meantime, we may start to see the inclusion of expressly defined good faith clauses in more commercial contracts. Where the parties consider what good faith means in advance and define this in their contract, they can enjoy more certainty. And if this leads to a better and fairer way of doing business, it should be welcomed. n

Bates & ors v Post Office Ltd [2019] EWHC 606 (QB)Bristol Groundschool Ltd v Intelligent Data Capture Ltd & ors [2014] EWHC 2145 (Ch)Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & anor [2015] UKSC 72UTB LLC v Sheffield United Ltd & ors [2019] EWHC 2322 (Ch)Yam Seng Pte Ltd (a company registered in Singapore) v International Trade Corp Ltd [2013] EWHC 111 (QB)

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